Supporters argue that Bitcoin has fundamental advantages over conventional currencies. The system is designed to transfer funds without a central authority, freeing Bitcoin users from bank fees and government regulations. The Bitcoin protocol offers robust anonymity, and the protocol guarantees that there will never be more than 21 million Bitcoins in existence, which supporters have argued would give the currency a stable value.

Unfortunately, the currency's value hasn't proven stable in practice. Several waves of media coverage between April and June pushed the currency's value up from less than $1 to more than $30. Soon after it reached a peak, the currency had a series of PR disasters. One Bitcoin user claimed that a half-million dollars worth of Bitcoins were stolen from his PC; he may have fallen victim to Bitcoin-stealing malware. A few days later, the most popular Bitcoin exchange was hacked, forcing a multiday suspension of trading and generating another wave of bad press.

Trading resumed in late June at around $17, and the currency's value has been steadily declining ever since. In August, one of the most popular Bitcoin "banks" claimed it had been hacked, and had lost hundreds of thousands of dollars worth of Bitcoins, triggering a fall in value to under $7. Bitcoin fell below $5 in September, and it is now worth less than $3.

So is Bitcoin doomed? The value of Bitcoins is (like any fiat currency) ultimately driven by supply and demand. With dollars, the supply is controlled by the Federal Reserve, and the demand is driven by the size of the US economy. The supply of Bitcoins grows automatically, asymptotically approaching 21 million, and the demand for Bitcoins is driven by the volume of Bitcoin-denominated transactions.

And that's Bitcoin's fundamental challenge: as far as we can tell, the volume of Bitcoin-denominated transactions is tiny. True, there are a few hundred merchants who say they accept Bitcoin, but most of them appear to be small concerns, and almost all of them also accept dollars, euros, or another national currency. They may do only a small fraction of their business in Bitcoins.

And that's not surprising. While Bitcoin doesn't have any formal transaction fees, transacting in Bitcoins carries risks that dealing in dollars or euros does not. If users store Bitcoins on their PCs, there's a risk that malware will gain access to their wallets and steal their funds. Conversely, if they put their Bitcoins in an "e-wallet" service online like MyBitcoin, there's a risk that that service will have a security breach, or that the owners of the service will themselves turn out to be crooks.

There are also risks due to volatility. For example, Bitcoins lost about 15 percent of their value on Monday between 8am and noon on the East Coast. Someone who bought Bitcoins on Monday morning expecting to spend them on Monday afternoon might find that Bitcoin-denominated prices had suddenly risen by 15 percent. The 2 percent transaction fee on credit cards might seem downright reasonable in comparison.

The current value of Bitcoin—just under $3—is still significantly above the April price of around $1. It's theoretically possible that the volume of Bitcoin commerce will grow enough to halt the slide in the currency's value. But the value of a currency is built on its reputation, and five months of bad news and depreciation have done serious damage. Indeed, the mood on Bitcoin forums has turned grim, with Bitcoin fans giving one another pep talks and debating how low the price can fall before the currency is declared dead. It'll be difficult to pull out of that kind of tailspin.

While i (partially) understand the arguments on why a currency like bitcoin could be a good thing, I have a harder time understanding who, now, is giving and taking bitcoins out of economic self interest. Other than il- or quasi-legal activities (or certain political beliefs hostile to government run currencies), why trade in this currency today?

What I don't get it is how the heck you're supposed to get anything done with only 21 million bitcoins. That isn't even enough to give one bitcoin to every Canadian. Was there a plan in place to increase the population cap on bitcoin, or was it always obsolete from the get-go?

What I don't get it is how the heck you're supposed to get anything done with only 21 million bitcoins. That isn't even enough to give one bitcoin to every Canadian. Was there a plan in place to increase the population cap on bitcoin, or was it always obsolete from the get-go?

The currency is accurate to 8 decimal places, so the idea was that in the future a Bitcoin would be worth thousands of dollars.

What I don't get it is how the heck you're supposed to get anything done with only 21 million bitcoins. That isn't even enough to give one bitcoin to every Canadian. Was there a plan in place to increase the population cap on bitcoin, or was it always obsolete from the get-go?

The currency is accurate to 8 decimal places, so the idea was that in the future a Bitcoin would be worth thousands of dollars.

So if all trade ended up in Bitcoin we would be faced with massive deflation at some point in the future. Lovely.

Buttcoin.org is a shill website, and the concept of decentralized anything terrifies the current powers that be. Lucky for us, they won't be much longer...

"Shill" is not a word for "people who disagree with me." The Buttcoin people, being somethingawful nerds with a good sense of the ridiculous, are hardly shills for anyone. It's a funny site about a ridiculous phenomenon.

Bitcoin was not currency and it never will be currency. People are willing to assign value to any stupid thing. That's just what's happened here. Valuable to some... maybe, but it isn't currency. Barter perhaps? A cart is worth three goats in 'Stan. But that doesn't make the goats a currency.

What I don't get it is how the heck you're supposed to get anything done with only 21 million bitcoins. That isn't even enough to give one bitcoin to every Canadian. Was there a plan in place to increase the population cap on bitcoin, or was it always obsolete from the get-go?

The currency is accurate to 8 decimal places, so the idea was that in the future a Bitcoin would be worth thousands of dollars.

So if all trade ended up in Bitcoin we would be faced with massive deflation at some point in the future. Lovely.

Yep. I basically thought the same thing. The health of the economy requires the money to supply to always be expanding. It doesn't seem to be a tenet in the bitcoin world. For a group that claims they want price stability they sure made a system that lacks it.

I mined 170 bitcoins back in March, then forgot about it, around June I saw them around 14$ each (they were around 1$ when I started) and sold them all. Made around 2500$ from two months of mining. I guess I got lucky and sold them just in time.

Bitcoin is *not* anonymous. At least not in the way that that implies. Specifically *all* transactions in the world are totally public and traceable by anyone. Pretty much the only anonymous thing is that you don't have to give use your real name as your bitcoin ID.

But if someone finds out your bitcoin ID (e.g. if you use an exchange) they can then see your entire transaction history! It is far from the anonymity of cash.

What I don't get it is how the heck you're supposed to get anything done with only 21 million bitcoins. That isn't even enough to give one bitcoin to every Canadian. Was there a plan in place to increase the population cap on bitcoin, or was it always obsolete from the get-go?

The currency is accurate to 8 decimal places, so the idea was that in the future a Bitcoin would be worth thousands of dollars.

So if all trade ended up in Bitcoin we would be faced with massive deflation at some point in the future. Lovely.

Predictability and stability are the most valuable features of a currency. The production of bitcoins falls off slowly and steadily, so there won't be sudden massive deflation. Since we all know almost exactly the total number of bitcoins that will be generated every day from now until it slows to a trickle, we can take into account the future value of our bitcoins and act accordingly.

The fact that bitcoins' value against hard cash can rise and fall, surely lends itself to being just like any other currency. Am I missing something major here?

Everything about bitcoin is designed to be abstracted away from anything physical (possibly except computing power, for the machines that "mine" them by solving problems). Even the limitation set on the amount of bitcoins is an arbitrary value designed to mimic the availability of natural resources. A group of kids trading among themselves by exchanging toys for Pogs has more concreteness behind it than bitcoins.

Bitcoin was not currency and it never will be currency. People are willing to assign value to any stupid thing. That's just what's happened here. Valuable to some... maybe, but it isn't currency. Barter perhaps? A cart is worth three goats in 'Stan. But that doesn't make the goats a currency.

It very much is. Currency is simply defined as a common medium of exchange (as opposed to barter, which is direct trade). Bitcoin qualifies. It might not be a good currency, but it is one nonetheless.

I personally think the market for Bitcoins were overhot at $30 per. I still think it has potential as a viable currency, and I mine some in the theory that it might be a viable general means of exchange. Heck, if I ever decided to put up a store front, I would accept bitcoins. Right now, I would value them rather conservatively compared to USD, due to their volatility, but I would still accept them.

In short, not doomed, just a premature bubble (nothing we ever know about in our markets...)

Timothy B. Lee / Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times.